Equities rise to start the fourth quarter

Prior week summary

Despite growing signs of a slowing recovery for the U.S. economy, a continuing rise of COVID-19 cases across Europe, and faltering stimulus bill negotiations on Capitol Hill, the major U.S. equity indices moved higher for the week with the S&P 500 snapping a four-week stretch of declines. Last week marked the end of an eventful third quarter for market participants. Although the S&P 500 recorded its first monthly decline in September since March, the index returned 8.5% in the third quarter and is up 4.1% year to date. The run-up in equities in the third quarter was partially driven by signs that the U.S. economy was recovering from the severe downturn in economic activity seen in March. While that narrative remains true, the pace of the recovery has slowed considerably from the rebound seen in the summer.

Market participants were the beneficiaries of a deluge of economic data releases last week with several notable indicators on the docket. The estimate for second-quarter GDP was revised modestly higher on Wednesday to a 31.4% annualized decline. While the second quarter’s dismal performance has been known for quite some time, the Atlanta Fed’s GDPNow model which attempts to forecast the current quarter’s GDP in real-time forecasted a 34.6% increase in real third-quarter GDP as of October 1. While a large rebound is expected in the third quarter, many analysts believe a full recovery of the U.S. economy could take years. On the manufacturing front, Thursday’s release of the ISM Manufacturing Index indicated that U.S. manufacturers grew for a fifth consecutive month posting a 55.4 reading. While the latest reading fell below last month’s 56.0 level, many analysts pointed to the strength of the new orders and production segments of the report as reasons for optimism. Factory orders rose 0.7% in August, notching a fourth straight month of gains, but that fell far below July’s 6.5% increase and modestly below analyst expectations. Friday’s release of the September non-farm payroll report indicated that the U.S. economy added 661,000 jobs in September, well below analyst calls for 800,000 job additions. The unemployment rate continues to improve on the surface falling for the fifth straight month to 7.9%. While the drop in the unemployment rate is encouraging, analysts cautioned that much of the decline can be attributed to roughly 700,000 individuals leaving the labor force. Jobless claims modestly beat expectations on Thursday as 837,000 individuals filed for unemployment in the last week. While the level of new claims remains elevated, continuing jobless claims dropped to 11.77 million from 12.75 million the week prior.

Stimulus bill negotiations between senior Democrats and the Trump administration continued throughout the week. After Secretary Mnuchin and House Speaker Pelosi made little progress towards a deal early in the week, the House of Representatives narrowly passed a $2.2T stimulus bill on Thursday evening by a vote of 214–207. The bill includes an extension of the $600 per week enhanced unemployment benefit, a second round of direct payments to Americans, and funding for a second round of the Paycheck Protection Program, among others. Speaking on Friday, House Speaker Nancy Pelosi appeared hopeful that a deal could be struck saying, “We will have a bipartisan bill, that’s our goal to have. I’m optimistic, I’m always optimistic. We always have to find a path, that is our responsibility to do so, and I believe that we will. Senate Majority Leader Mitch McConnell appeared less optimistic about the prospects of a deal but reiterated his commitment to helping pass the legislation should a bipartisan deal be reached saying, “The principle negotiation is between the President and the Speaker of the House. If they can reach an agreement, I will take a look at it and see whether I can sell that to Senate Republicans.”

The look forward

In a light week for economic data releases, market participants are looking forward to updated figures on the ISM Non-Manufacturing Index, jobless claims, and wholesale inventories, among others. The minutes of the FOMC’s latest meeting are released on Wednesday.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)